“Act II” depicts what has been called “sovereign debt crisis”, with Greece occupying the centrestage in Scene I, Dubai and Iceland in the backdrop and a host of European countries like Portugal, Spain, maybe even the UK waiting in the wings.
After joining the EU at the turn of the century, Greece enjoyed the apparent benefits of the European Common Market for half a decade or so, growing at nearly 3.5 per cent per year – a remarkably high rate for advanced economies – on borrowed money, while at the same time incurring huge current account and fiscal deficits. The deep-seated problems did not come to light until 2008. But when growth slipped that year owing to the international crisis, the process became unsustainable.
With its national debt reaching nearly 120 per cent of its national income (GDP) by May this year, the country reached a near-insolvent position where it was on the brink of defaulting on its sovereign bonds (bonds issued by the state). The usual recourse in such cases – issuing fresh bonds or taking fresh loans from big banks to pay back the old ones – was hardly available. Which private bank or financial institution would invest in bonds issued by a country whose credit rating had been lowered several notches by international credit rating agencies? The danger of sovereign default thus loomed large, threatening to drag the euro and the countries using that currency with it.
The banks of Europe, particularly those in Germany and France which together held nearly 70 per cent of the near-junk Greek bonds, took fright and pressured their respective governments to reverse their (the governments’) earlier stances and spend taxpayers’ money to “bailout Greece”.
What the bankers were actually trying to salvage, however, was their own financial interests – their investments in Greek securities. The German and French governments did the bankers’ biddings and, at the instance of the big two, the European Union and the International Monetary Fund approved a nearly $1 trillion package to be released over three years. This was necessary, they argued, to stop Greece’s debt crisis from spilling beyond its borders into the rest of the eurozone.
But taxpayers in France and Germany were reluctant to allow the financial oligarchy to shift the tax burden onto labour. They expressed their strong dissent in more ways than one. In Germany for instance, the ruling coalition led by Angela Merkel suffered heavy defeats in recent regional polls.
Even angrier are the people of Greece, and for good reason. The loan package came with a heap of anti-people conditionalities. Athens will have to reduce fiscal deficit from the present 13% to 3% of GDP by 2012, which would necessitate a series of measures like freezing wages and pensions for five years, drastically reducing pensions and social services, increasing the retirement ages, abolishing the list of hazardous occupations, hiking the rate of Sales Tax and so on. Hundreds of thousands of jobs are to be cut and workers will take initial pay cuts of 20 per cent or more.
Relinquishing its economic sovereignty to the EU and IMF, the government of the social-democratic PASOK party also accepted the stipulation that subsequent tranches of the aid package would be made available only if IMF and EU auditors in their periodic reports certify that the country is rigorously following prescribed policies of fiscal discipline and structural reforms. Moreover, newer “austerity measures” are being – and will continue to be – imposed. Thus on 16 June Prime Minister George Papandreou announced a decree that raised the minimum rate of lay-offs per month from two per cent to five per cent of the total personnel in an enterprise – this at a time when unemployment had already hit 11.7%, the highest in 10 years – and cut by 50% the compensation for laid-off employees.
But the Greek workers are in no mood to accept all this without a fight. Ten successful strikes have been organised this year by the All Workers' Militant Front (PAME), including a 24-hour general strike and a 48-hour strike by all Public servants. Especially notable were the violent street demonstrations on 5-6 May and the 20 May strike. On the latter date a few hundreds of strikers occupied the building of the Ministry of Labour and hanged a banner on the building's façade bearing the slogan “Reject the measures”. Public buildings were also occupied in other cities across the country. Powerful demos were held on 16 June in front of the Parliament in Athens and in other cities with slogans like “IMF get out”.
Governments in Germany, Spain and other European countries are also adopting a series of austerity measures (like cutting back on social services) to impress the bond markets, repair credit ratings and make it easier for them to borrow. But despite all these steps, concern that the crisis may spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year.
Moreover, such measures go against a time-tested economic policy. When fighting recession, governments are supposed to spend more to compensate for slackening outlays by hard-pressed consumers and businesses so that demands pick up. U.S. Treasury Secretary Timothy Geithner therefore had a point when he appealed to EU finance chiefs to emulate the aggressive-spending, deficit-boosting, inflation-risking approach of the Obama administration. Former chairman of the Federal Reserve Alan Greenspan, on the other hand, wrote an opinion piece titled "U.S. Debt and the Greece Analogy" (The Wall Street Journal, 18 June 2010) where he warned the US government against “a sense of complacency that can have dire consequences".